essensys hosted an interactive webinar last week featuring leaders in commercial real estate for flexible workspace. Panelists included long-time workspace real estate consultant Giovanni Palavicini of Fronteras Commercial Real Estate, Colliers Internationals’ Workspace Advisory Services principal Ryan Hoopes, and veteran workspace CRE player and founder of work well win Frank Bistrian. The conversation was curated based on topic-specific questions sent in by the attendees.
Below are the top things the shared workspace market learned from this webinar.
In this article:
Movement Towards a Symbiotic Relationship
Ryan Hoopes kicked off the webinar explaining how the natural synergy between CRE assets and flexible workspace consumption has created the stage for a shift towards a more symbiotic and productive relationship between commercial real estate stakeholders and asset owners with flexible workspace or coworking operators. The impetus seen as a result of We Work’s and Regus’s activity in the market has also helped to pave the way for “friendlier, more creative less adversarial relationships that focus on achieving the goals the landlord has set for a particular asset rather than just capitalizing on or increasing the value of the asset.”
While leases are still prevalent, there is a noted transition towards the following relationship structures, which the webinar panelists described as the following:
- Joint Venture partnerships (JV) provide a happy medium in that both sides – landlord and operator – are producing capital to put together an entity that will run the operation and then share the profits.
- Management Agreements – an operator is hired by the landlord to curate the workspace operation and experience.
While these are the basic outlines of these structures, the panelists all agreed that, for one, no two agreements are the same and “like everything in real estate, it’s all negotiable.” While you may strive for a creative partnership or agreement it’s vital to understand that there are inherent risks that come along with any workspace operating model agreement.
- In a Joint Venture, the inherent risk is that landlords may try to bring in another operator if the business isn’t living up to their expectations.
- In a management agreement, operators are more exposed to risk and may not be protected from running or owning the center long-term. Termination clauses are key. Operators run the risk of the landlord taking the space back in the event they’ve fronted all of the capital to build it out.
Equally, there are risks for landlords to consider before entering into an operating agreement. According to Frank Bistrian, the “landlord protects himself with the minimum base rent he can live with, and then builds the deal around that.” Landlords and property owners working with banks or investors must also prove the viability of the operation. It’s “an investment for the landlord. They’re not betting on your concept. They’re betting on you.”
Working with Landlords and Developers
Giovanni Palavicini put it best, “every landlord is different. Every asset is different. Deals will vary from asset to asset. That’s the beauty of our industry.” Getting in front of landlords can be a challenge and selling your workspace concept to them can be even more demanding. For Giovanni, the most significant barrier to entry to a JV partnership or a management agreement is not being able to demonstrate experience or a track record of success in coworking.
That said, workspace CRE expert Frank Bistrian explained that landlords have different levels of risk tolerance when stepping into unknown territory like flexible workspace. “Industrial landlords, for example, may have set parameters they must adhere to, whereas smaller building owners may be able to take more chances.” He offered simple, sound Dos and Don’ts advice to operators before jumping into a deal:
- Do work within your abilities and capital limits
- Do be realistic with yourself about what you can take on
- Don’t move forward if the deal is too big
- Don’t overestimate how quickly you can fill your space
- Don’t underestimate the build-out cost
- Don’t burn bridges with landlords or developers
- Do have a plan that’s achievable
- Do account for problems in your pitch to landlords
- Do be confident and show you can execute
As much as operators need to sell themselves and their brand to a landlord, there are equally many value-adds they bring to the table which shouldn’t go unmentioned. All of our panelists agreed that there are hundreds of landlords trying to run their own coworking spaces but fail. For one, a landlord-operated coworking space is broadly just a large space. “What’s attractive about working with a coworking operator is that the landlord’s property asset becomes part of a larger network,” explained Bistrian.
While every landlord’s requirements will be unique, coworking operators that can demonstrate a smooth and consistent operation. From tidy finances and a bustling community to technology infrastructure, operators who have it down to a science show credibility and a level of guarantee in the eyes of a landlord.
When it comes to coworking, landlords may feel like they’re missing out if they aren’t diversifying their asset portfolio. However, they’re also used to and counting on a stable revenue stream thanks to years of traditional leasing models. Bistrian pointed out, “it’s much easier to rent 100,000 square feet than it is to lease 100 spaces at 1,000 square feet each. And that’s where operators can benefit. Entering into a JV or management contract allows landlords to learn from an operator’s coworking expertise while staying relevant and profitable in commercial real estate.
It’s worth recognizing the mutually beneficial relationship between a landlord and a flexible workspace operator. Although an operator must demonstrate their credibility with an excellent business background and a well-documented, successful coworking operation, sometimes just getting in front of the right people can be a challenge. Across the board, the panelists encourage leveraging consultants or brokers who know the industry to help find a business match and prove your track record.
Workspace Consultants and Brokers: Leveraging the Pros
Managing the broker relationship while making the most of it, according to Palavicini, is about realizing that they add value to your CRE strategy by way of their experience in the niche and relatively young flexible workspace market. “The best brokers and consultants understand your real estate strategy, who you’re targeting, and can provide a set of target locations” keeping your competition in mind.
It’s not conducive to approach a creative partnership as if it were a traditional office deal. Palavicini clarifies that working with specialized brokers sheds light on factors of contract negotiations that operators may otherwise miss. “They’re structured a lot like retail deals. You’ve got a single asset entity, burn-offs in some cases, a percentage of rent or some sort of partnership. It’s a lot more complex than the average broker is used to handling in an average transaction. And it’s all about the experience.” Bistrian agreed, “brokers are the most important people in the community. They’re the boots on the ground; they know who is looking for space. They control a lot and paying the full commission is worth it.”
Regarding brokers, Ryan Hoopes warned against those who lack the knowledge of intricate coworking deals: “the name of the game is not to waste time.” Don’t try to fit your coworking requirements into the traditional model just because a landlord doesn’t understand the concept of coworking. “Be upfront from the get-go about what type of operator you are and what you’re looking for” in a space asset before even visiting a site.
Commercial Real Estate Workspace Strategy: Due Diligence
Aspects like market, location, and signage are essential, but what a successful CRE strategy comes down to is knowing your business model in and out and achieving the most favorable lease structure. According to Ryan Hoopes, due diligence is critical. “Don’t get your heart set on a space before uncovering and removing roadblocks and challenges to operating the space.”
On a macro level, Palavicini describes the first fundamental steps in the due diligence process to avoid settling in a saturated, overly competitive market: “map out the entire market and competition in prime and secondary cities and then overlay a clearly defined list of your target customer on top. It can take hours upon hours of due diligence before finding the right building before you can even learn if a landlord is willing to work with your ideal deal structure.
On a micro level, according to Hoopes, vet the landlord or property owner. “If it’s a known national landlord with proven knowledge about and affinity to coworking, you’ve won half the battle. If they’ve already worked with Regus or We Work, that’s big.” Shave time off the standard leasing process by clarifying your deal parameters and knowing your capital limits on securitization, free rent, tenant improvements, cost to construct the space in that market.
A Simplified Flexible Workspace CRE Strategy
Keep your finger on the pulse of the market. Panelists Palavicini and Bistrian are advocates of following corporate real estate trends. Knowing where dynamic technology growth is happening across markets, where your competition is and even where Amazon is taking office space puts you in key markets ripe for coworking.
Chase the right real estate, not the perfect deal structure. Hoopes explained, “coworking is a low barrier to entry solution to a high barrier to entry environment.” A good litmus test for your next market is to evaluate how available a short-term, direct deal lease is. If it’s difficult to attain, then coworking would work in that market.
Low vacancy rate cities often provide more of an obstacle when trying to negotiate an aggressive deal structure, but they also prove to have higher economic activity and therefore prove to be a favorable market to fill your space.
Franchising Model: Easy Access to Coworking
In the US market, three primary groups are operating a franchise model: Serendipity Labs, VentureX, and Fueled Collective. For Colliers International, Hoopes explained, this model solves some of the primary concerns addressed in the webinar. For example, certain limitations are removed from the equation when high-net individuals with business experience open a franchise and are fully-vested in the success of the business. He predicts that developing methods and processes to support the franchise will become more common in the industry.
On the flip side, Palavicini suggests that while franchises can remove certain obstacles to a coworking model, they also require an equal degree of due diligence by all parties. Those interested in coworking can leverage a franchise to launch an operation, but they often overlook the abundant resources at their fingertips to start their own workspace brand. From brokers and operational consultants to workspace technology providers, it can all be outsourced, allowing operators to prevent “brand cannibalization.” “Franchises can have a different interpretation of things,” explained Bistrian. “This model makes more sense to some than others.”
Real Estate and Flexible Workspace
Flexible Workspace meets CRE brought valuable insight to operators around leases, pitching to landlords and approaching a viable commercial real estate strategy. Leveraging the mutual benefits around a healthy landlord-operator and broker-operator relationship offer great potential for success to all parties involved.
A big thanks to Giovanni Palavicini, Frank Bistrian and Ryan Hoopes for contributing a wealth of knowledge to the workspace community during this webinar event. Click here to read more expert pointers from Giovanni. If you’d like to be a panelist on our future webinars, let us know here.
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